Making Tax Digital (MTD) rules will be compulsory for VAT periods beginning on and after 1 April 2019. So if you haven’t started to communicate with your clients about MTD, you need to start now.
Who to tell?
You should send a general message to all of your business clients about MTD. However, the ones you need to focus on are businesses who are already VAT registered and businesses who may have to register for VAT in 2019.
Some VAT registered businesses will be exempt from MTD because of their turnover and others will need to claim an exemption from MTD.
Businesses with an annual turnover of under £85,000 are automatically exempt from the MTD rules, even if they are VAT registered.
The VAT notice on MTD (Notice 700/22) is misleading on this point. It says: “Only businesses with taxable turnover that has never exceeded the VAT registration threshold (currently £85,000) will be exempt from Making Tax Digital.” This is incorrect, as the turnover test for MTD comes into effect on 1 April 2019, and requires the business to measure its taxable turnover for 12 months ending with the last complete month, which on 1 April 2019 will be 12 months to 31 March 2019. The level of turnover recorded for earlier years is irrelevant.
Exemption example. Meet Paul
Paul is VAT registered because his taxable turnover in 2013 was £80,000, when the VAT registration threshold was £79,000. If Paul’s annual turnover is £80,000 at 1 April 2019 and he is still VAT registered, he doesn’t have to comply with MTD. Paul can continue to submit his VAT returns as he does now, either by inserting the figures into the online form (the HMRC portal) manually, or through his accounting software.
“Taxable turnover” means VAT-able supplies, which are all sales subject to VAT including zero-rated sales, but not exempt sales. For both the VAT registration test and the MTD entry test, the business must keep an eye on its taxable turnover for the last 12 months. However, for MTD entry there is no forward-looking test of the value of supplies to be made in the next 30 days.
Checking clients’ turnover
Where a business has registered for VAT voluntarily and its turnover is under £85,000, it will have to check its cumulative turnover every month, for the last 12 month period, to see if it must comply with the MTD rules from the beginning of its next VAT period. Once a business has been required to enter MTD due to its turnover being above the VAT threshold, it can’t opt-out again while it is VAT registered. The business will only be able to leave MTD if it deregisters for VAT.
The requirement to join MTD is based on the VAT registration turnover threshold, which has been frozen at £85,000 until at least April 2020. If the VAT registration threshold is reduced in future, more businesses will be drawn into MTD.
Business owners who wish to claim exemption from MTD on the basis of the owner’s religion, insolvency of the business, or because it is not reasonably practical for the owners to use digital tools to keep business records, must call the HMRC VAT helpline.
HMRC is planning to write to all the VAT registered businesses who it thinks will be required to comply with MTD. The recipients of that letter are likely to be chosen based on their turnover reported in VAT returns for the last year. You should contact those clients before this letter arrives on their desk.
How to communicate
Each accountancy practice is different and clients have varying needs, so you need to find a way of informing your clients about MTD for VAT which fits both your practice’s approach and your clients. QuickBooks have prepared a marketing kit for accountants which is available on the QuickBooks MTD Resource Centre.
HMRC has also prepared a communications pack for accountants to use as raw material when writing or speaking to clients about MTD. There is no indication that HMRC will run an advertising campaign about MTD, so it will be up to you to tell your clients about this major change in how VAT must be reported.
Which clients should you focus on?
At this stage you should concentrate your efforts on getting VAT registered businesses prepared for MTD, particularly if those businesses currently keep manual accounting records.
There is no such urgency for businesses who are not VAT registered and are unlikely to become VAT registered, as reporting for income tax and corporation tax under MTD won’t become compulsory until at least April 2020. Mel Stride, the Minister for HMRC said in a written statement to Parliament in July 2017: “The Government will not widen the scope of MTD beyond VAT before the system has been shown to work well.”
QuickBooks can help you communicate with your clients about MTD. Download our free MTD Marketing Kit for accountants and bookkeepers.
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